And thanks as well to all of you for being here and coming out in such numbers. It's very gratifying to see this Conference surpass our goals for attendance. This kind of turnout speaks well of your firms' support for compliance.

How best to spread and strengthen that commitment and improve compliance throughout the industry will be my main theme with you this morning. But first, let me touch on one key aspect of the "state of the NASD." Specifically, where things stand with NASD's strategic decision, made in the year 2000, to return to being a pure regulator.

Pending exchange registration for NASDAQ, over the last three years NASD has done essentially everything we can to transform ourselves from the parent of NASDAQ to an independent entity focused solely on regulatory services.

I remain hopeful that NASDAQ and the SEC will find a way to achieve exchange registration without much further delay. This will be a big step to strengthen investor confidence. Now more than ever, it is vital for investors everywhere to know that the U.S. security industry's main self-regulatory organization is focused solely on investor protection and market integrity, and isn't in any way distracted by running a market.

Which brings me to what has been my overriding mission since practically my first day as head of NASD. That is restoring investor confidence. And here I view NASD's role as having four main parts.

First, having appropriate rules in place.

Second, making sure they are rigorously enforced.

Third, striving to achieve a high level of investor education.

And last—but far from least—working for an even higher level of securities industry self-compliance.

I'm going to focus this morning mainly on two of those elements, self-compliance and enforcement. Because larger doses of self-compliance will mean smaller doses of enforcement. This is a central point and I'll expand on it later.

Of course, writing good rules and providing good investor education are important as well. So let me begin by summarizing those two aspects of what NASD has been doing.

NASD has issued two sets of rules to make investors more informed and analysts more independent. These rules were the model for several key provisions of the $1.4 billion dollar "global settlement" against ten large investment banks.

Our rule-writers have been active on the IPO front as well. Last year, we issued proposed rules to make even more explicit the prohibitions against the most prevalent initial public offering abuses—spinning, laddering and quid pro quo arrangements.

Further, NASD helped to convene and organize a blue-ribbon panel that recommended some very useful reforms regarding how initial public offerings are priced, publicized and allocated.

The panel didn't agree 100 percent on everything. Frankly I would worry a bit if they had. But they very clearly did agree that this vital part of the capital formation process needs to become more open and transparent. And I believe their recommendations will help us put the "public" back in initial public offerings.

But there's something we have to be careful about, as well. And I'm not alone in worrying about it. SEC Commissioner Harvey Goldschmidt, for example, discussed it publicly this month. In seeking to cut off the flow of conflicted or downright corrupted research, we must do all we can not to cut down the volume of competent research. Particularly as to small and medium-sized public companies that may be covered by just one or two analysts, who often work for regional investment banks with small research departments. Such companies are a key source of growth and new jobs in our economy. So this is not an idle concern; it's a very real one. And I am very sensitive to it.

The various new rules covering analysts and IPOs will help ensure that the worst excesses of the market bubble will not be repeated. We have also been busy drafting new rule proposals that seek to get ahead of the curve and prevent harm in new areas of concern.

One main such area is mutual funds. In August, NASD proposed greatly expanded disclosure of mutual fund compensation arrangements. When a brokerage firm or its registered representative has a financial incentive to recommend particular funds, we think investors ought to know about it. This will be one of the issues you can learn more about—including its legislative as well as regulatory state of play—in the concurrent session tomorrow morning on "Mutual Fund Developments."

Later in August, NASD also published for comment a proposal for heightened supervision of brokers with a history of customer complaints, investigations or regulatory actions. We want to see firms respond to the increased risks posed by such brokers by putting in place appropriate plans for heightened supervision and holding supervisors accountable. This is another area you can learn more about in this Conference—through an interactive discussion of case studies this afternoon and again tomorrow afternoon.

One effective way to protect investors is to arm them with good, objective information. Indeed, NASD believes that in many circumstances, investor education can be the best investor protection. This does not take the industry or its regulators off the hook in striving for 100 percent compliance. Far from it. But investor education does make for an investing public that is more knowledgeable, more assertive in asking questions, has a clearer sense of its own interests and limitations, and is less likely to succumb to bad practices that are not caught by the firms or the regulators.

Mutual funds have been a particular focus of NASD's investor education efforts. This year alone, we have issued some half a dozen Investor Alerts on A vs. B vs. C share classes and the like. We have unveiled an innovative "Mutual Fund Analyzer" on our Web Site, which a number of firms link to. And in response to member requests, we are rolling out a version of this tool that firms can post on their own Web Sites.

All this has been on top of Investor Alerts in such areas of concern as funds of hedge funds, principle-protected funds and variable annuities.

I wish I could say new rules and enhanced investor education is all that is needed in such areas. But the reality has been quite different. For example, variable annuities is just one of the matters on which we've had to combine ramped-up investor education with an aggressive enforcement action.

In the area of mutual funds, we have been instrumental in shaping a solution to the widespread problem of investors not getting the volume discounts off the front end loads to which they are entitled. Thanks to good work first by NASD's Philadelphia District Office, we caught the breakpoints problem early and were able to handle it well—as the operational issue it is, versus another matter of scandal and intentional fraud. But let's not forget that what we all hope is on its way to becoming an investor protection problem solved began as a widespread compliance failure. And it could have resulted in a real black eye for the industry.

On mutual funds more broadly, NASD also has had to be very active in the area of enforcement. We have brought some 60 enforcement cases this year in the mutual fund area, and 200 over the last 2-1/2 years. And last month, we announced an important addition to this enforcement record, the Morgan Stanley case.

NASD censured and fined Morgan Stanley $2 million for conducting prohibited sales contests for its brokers and managers to push the sale of Morgan Stanley's own proprietary mutual funds. We also censured and fined the firm's head of retail sales. The estimated value of the NBA finals tickets, resort trips, concert tickets and other prizes awarded in the contests totaled $1 million. We uncovered 29 such contests at the branch, regional and national level over a three year period.

The obvious danger of such contests is that they give firm personnel a powerful incentive to recommend products that serve the broker's interest in receiving valuable prizes, rather than the investment needs of the customer. And one of the most troubling things about this case is Morgan Stanley's failure to have any systems or procedures in place that could detect or deter the misconduct, which clearly violated NASD's existing rules on non-cash compensation.

And that brings me squarely to one of my core convictions about the security industry's performance in the market bubble and its aftermath. The main problem has not been a lack of rules. It has been a lack of compliance with the rules. And to remedy this, we should look first not to regulators or politicians in Washington or New York. We should look first to the front line of compliance for the industry—which is the firms themselves.

For this lack of compliance has undermined investor confidence and with it, the industry's business prospects for the better part of three years. And no one has a greater incentive or better means to solve this problem than you.

Don't get me wrong. If enforcement is needed, NASD has shown its willingness to provide it—with teeth. On average, we bring over 1,200 disciplinary actions and weed out more than 700 unfit brokers and dealers from the securities industry every year.

Now more than ever, we are heeding the wisdom of the British judge who said, "Justice should not only be done, but should manifestly and undoubtedly be SEEN to be done." For it is human nature to want proof that a bad situation has been set right, and to want to see that wrongdoers are in fact being punished for their violations. Doing this is imperative if we are to rebuild investor confidence.

Toward this end, NASD has brought dozens of high-profile enforcement cases in the wake of the bubble to let both the brokerage industry and the public know that the dishonest practices of the 90s will not be tolerated. For example, we have brought cases against some 40 firms and individuals to date for violations in analyst research and initial public offerings alone.

I don't need to detail for you all the big cases we have brought or the big fines we have imposed or the big violators we have worked to remove from the industry. You already know the names. CS First Boston. Salomon Smith Barney. Jack Grubman. Henry Blodget. Frank Quattrone. NASD has already shown that we will not shrink from going after firms that have done wrong because they are too powerful; or from pursuing individuals who have crossed the line because they are too influential; or from bringing cases that are just because they are too hard.

And we are certainly not done with our efforts. NASD will continue to investigate and develop cases against those who have violated their supervisory or individual responsibilities to the investing public.

But here is my principal point. While NASD is quite willing and able to be a tough enforcer, it is far better for everyone when we do not have to be. Because enforcement—forced compliance—comes after the damage is done; after investors have lost money they should not have lost; after investor confidence has been harmed.

By contrast, improved self-compliance can prevent investors—and investor confidence—from being harmed in the first place. And that is good for all of us—the industry, the regulators and most of all investors—who benefit from healthy markets and a healthy equity culture in this country.

This is why fostering better industry self-compliance is an integral part of NASD's responsibilities. Because it is the firms themselves that can provide the earliest deterrence and detection, and the swiftest, most cost-effective response. After all, firms know what's going on in their business—or not going on—better than any regulator can.

So NASD is fully committed to doing everything we appropriately can to help you meet your self-compliance responsibilities. That means providing value-added tools, information and services. It means developing and delivering the best education and training in the industry. And it means you should track down Ann Short, Bob Gulick, or one of our other people in your particular area of interest and get to know them and what they can do.

In just the last two years, the reality in which our member firms operate has been fundamentally transformed. The economic environment is different; the legal and regulatory environment is different; the attitude of investors, the media and Congress is different. Reputational and compliance risks that once seemed able to take a back seat are now front-burner issues—and they are not going away.

Many firms have gotten the message and gotten with it in terms of adapting to these fundamental changes. But some firms have not.

Do any of you remember the classic line from the ad, "You can pay me now or you can pay me later"? You might think of self-compliance as paying now. And of enforcement as paying later.

The costs of solid compliance and supervisory systems should be counted as the costs of doing business in the securities industry. But they may also be thought of as an investment in reputational capital that produces and preserves future revenues. At the largest firms, such expenditures are counted in the millions of dollars. The scandals of the past two years, by contrast, have shown that the regulatory, monetary and reputational costs—in terms of both diminished market value and lost business at our nation's largest investment houses—are counted in the billions. You can do the math. And you are in a prime position to see which approach makes better business sense.

All this and more led NASD to make our proposal for a signed, annual certification by the Chief Executive Officer and chief compliance officer of every firm. This certification proposal is not really a new rule, but a mechanism to increase compliance with existing rules. NASD made this proposal not to pin a bulls-eye on the back of you, your boss or anyone else, but to promote increased attention by senior management to compliance and supervisory issues and the officials who deal with them. We are seeking nothing less than to foster a heightened culture of compliance by restoring some balance between the voice and influence of compliance personnel, and the clear clout of top producers and business personnel.

NASD has received a large number of comment letters on the draft proposal. We are working to revise the rule so that it can produce the needed benefits without unintended, adverse consequences.

Those of us in this room who have gray in our hair—if we are lucky enough to have hair at all—also have the perspective to recall firsthand that the kinds of concerns about noncompliance I have expressed this morning are not unique to our time and place. A similar perspective was expressed even more broadly by Benjamin Disraeli, the English statesman, who said in the language of the 19th Century, "When men are pure, laws are useless; when men are corrupt, laws are broken."

The last several years have reminded us all starkly that bubbles bring out the worst in the free market system. That is not news to you. But what you may find more eye-opening is how often major bubbles also bring on a rising tide of regulation which typically does not abate for many years after the bubble has burst.

Consider just some of the prominent examples in which the pendulum of reform has swung too far. After the Crash of 1929 and the Great Depression, the Glass-Steagall Act separated commercial and investment banking for over half a century.

After the South Sea Bubble of 1720, the formation of new corporations was banned in Britain for more than 100 years. Thirteen years after the bubble burst, Sir John Barnard's Act outlawed all futures, options and short sales—and while often ignored in practice, it stayed on the books for some 160 years.

After the 1929 Crash, the federal securities laws were not enacted until 1933 and '34, Glass-Steagall not until 1934, the Maloney Act not until 1938, and the Investment Advisors Act not until 1940. For us sitting here in 2003, it's worth noting that the high tide of regulation first hit in 1933 and did not recede until the decade ended.

Simply put, history teaches that in circumstances like these, Sarbanes-Oxley is very unlikely to be Congress's last word on the subject. And the risks of overreaction today are by no means limited to Washington. That is why striving for 100 percent compliance is not just good regulation, or even good business, but also smart prevent defense in the present climate against any potential political impulse to send securities industry self-regulation the way of self-regulation in the accounting industry.

In other words, what I'm talking about is not only what's good for investors or regulators. It is profoundly in the self-interest of every person in this audience, and of the firms you represent.

I have spoken to you this morning from the conviction that what we need now is not more pervasive regulation, but the best possible regulation, the best possible enforcement and above all, the best possible compliance, including self-compliance. All of that is NASD's focus today as a private-sector regulator, as we work to rebuild investor confidence in the four main ways I have described.

And now there's one last thing this private-sector regulator should do. That is to stop taking up all the oxygen in this room and get to the best part. Which for me, particularly with this audience, will be the question-and-answer.